Energy Transfer to Shed Propane Biz

Energy Transfer Partners, L.P. (ETP - Analyst Report) has signed a deal with retail propane distributor AmeriGas Partners, L.P. (APU - Snapshot Report) for the sale of its propane operations. The sale price has been settled at approximately $2.9 billion, including $71 million in the existing Heritage debt.

With this deal, Energy Transfer will receive $1.5 billion in cash and approximately $1.3 billion of AmeriGascommon units. Additionally, AmeriGas has agreed to assume $71 million of existing debt in Energy Transfer’s two propane units. Upon the closing of the transaction, Energy Transfer will control about 34% of the common units of AmeriGas Partners which it has committed to retain until at least 2013.

The properties to be disposed include Energy Transfer's propane operations in 41 states. These comprise Heritage Operating, L.P. and Titan Energy Partners, L.P., collectively known as Heritage Propane.

The deal, which has been unanimously approved by Energy Transfer’s board of directors, is slated to close late in 2011 or in early 2012.

Energy Transfer has been toying with the idea to sell off its propane business for quite some time as it wants to concentrate on its key business –– the pipeline sector. The sale proceeds will be used by Energy Transfer Equity L.P. (ETE - Snapshot Report) –– the general partner for Energy Transfer –– to buy Southern Union Co. (SUG) for $5.1 billion.

Dallas, Texas-based Energy Transfer is a master limited partnership andengaged primarily in two businesses. These are gathering, processing, storage and transportation of natural gas, and the distribution of propane.

We believe the partnership is well positioned to compete in natural gas midstream and transportation & storage businesses with its geographically broad asset mix. Energy Transfer has a significant market presence in each of its operating areas, which are located in major natural gas-producing regions of the U.S.

However, the lingering effects of the weak natural gas market will likely dilute the growth prospects of the rapidly expanding natural gas liquids business of Energy Transfer. Moreover, the uncertain macro environment and cost overruns on expansion projects remain major areas of concern.

We maintain our long-term Neutral recommendation on the stock, which also hold a Zacks #3 Rank (short-term Hold rating).